Costs News

10 March 2016
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Incurred costs: “Don’t kick the can down the road”

Parties that want to take issue with the incurred element of a costs budget should do so at the first case management conference, the Court of Appeal has warned.

The ruling in Sarpd Oil International Ltd v Addax Energy SA & Anor [2016] EWCA Civ 120 puts lawyers on notice that agreeing budgets does not just “kick the can” along the road to detailed assessment, a well-known Costs Lawyer said.

In the main part of the ruling, the Court of Appeal overturned a High Court decision denying an order for security for costs even though the party involved refused to show that it could pay costs. This was “illogical and unacceptable”, said Lord Justice Sales.

The lower court had found this to be a litigation tactic, but Sales LJ said it was reasonable to believe that a party could not pay the other side’s costs if it deliberately refused to show that it could.

Mr Justice Andrew Smith had further indicated that, had he ordered security, he would have done so with reference to Addax’s approved costs budget. Sarpd argued that, in such a situation, the judge should go behind the budget to examine for himself whether certain sums were reasonable and proportionate.

But, on this point, the Court of Appeal agreed with the judge on the basis that Sarpd had had its chance to challenge the budget at the case management conference.

Sales LJ said: “First, all the parties appreciated, or should have appreciated, that the first CMC was the appropriate occasion on which issues between them regarding the quantum of costs shown in their respective costs budgets should be debated. That was so both in relation to the estimated costs elements in the budgets, in respect of which a costs management order might be made under CPR part 3.15(2)(b) and pursuant to paragraph 7.4 of practice direction 3E to record the court's approval of those elements, and in relation to the incurred costs elements in the budgets, in respect of which it would be open to the court to make comments under paragraph 7.4 of PD3E.

“Moreover, CPR part 3.17 makes it clear that costs budgets are to be important instruments for all case management decisions, so parties must appreciate that if they wish to take issue with another's costs budget they should do so at the first CMC, when there is to be debate about the costs budgets.

“In this case the first CMC, and the process leading up to it, afforded each party a fair opportunity to make any submissions they might wish on each other's costs budgets.”

Sarpd had chosen not to dispute the reasonableness and proportionality of the sums set out in Addax's and part 20 defendant Glencore's costs budgets, and there had been no material change since.

Sales LJ said: “On this application, it would be contrary to the overriding objective to allow Sarpd to try to re-open costs issues which it had already had a fair opportunity to address. It would not be just to permit it to do that and it would add disproportionate cost in dealing with the case if a court had to go behind the settled costs budgets in a case like this.

“To allow such a course would add unnecessarily to expense, rather than save it (see CPR part 1.1(2)(b)); would be likely to add to the time and effort required to argue and determine a security for costs application and so would contravene the requirement to ensure that cases are dealt with expeditiously and fairly (see part 1.1(2)(d)); and would also involve allocating an inappropriate share of the court's resources in having to re-visit an issue already dealt with by the court (see part 1.1(2)(e)).”

Secondly, the judge continued, Addax and Glencore’s costs budgets, as ‘approved’ in and appended to the order of Mr Justice Blair at the CMC, “will be a strong guide as to the likely costs order to be made after trial, if Addax is successful, both in relation to the incurred costs elements and in relation to the estimated costs elements.

“It is therefore appropriate that the costs budgets as so ‘approved’ should be used as the relevant reference points for considering the amount which should be ordered for security for costs.”

Costs Lawyer Andy Ellis, managing director of Practico, said: “The strong warning is to beware the implications of agreeing budgets in all situations without suitable caveats as to future challenges to the incurred costs elements.

“While the court cannot 'approve' incurred costs, failure to register specific objection to that element at the right time (i.e. the CCMC) can put the eventual paying party in difficulties when challenging later. Agreement of budgets can bring ‘good reason to depart [downwards]’ into play for incurred costs too.

“This looks to me like much stronger authority than Lord Justice Moore-Bick's obiter remarks in Troy Foods. The implications are quite serious for those who might have thought agreeing budgets just kicked the can along the road to detailed assessment.”

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